Commercial property investment
How to get started with commercial property investing
Whether you’re new to investing or know a thing or two, there’s a lot to discover.
One thing you’ll have heard is the importance of a diverse portfolio. Having a wide range of investments can help manage the ups and downs of individual asset classes.
Investing in commercial property - directly or via listed real estate investment trusts - can complement other asset classes in an investment portfolio. At Charter Hall, creating and managing these types of investments is our speciality.
Direct property can provide the potential for capital growth over the long term, benefits associated with a diversified portfolio, access to regular income and returns that have a low correlation to listed investments.
Investments in listed real estate trusts also offer the potential for capital growth and diversification benefits. As they can be traded on a stock exchange, these types of investments are subject to market volatility, however they provide the benefit of liquidity.
All information on this page is of a general nature only. For specific advice relating to your needs, please speak with a financial adviser.
The fundamentals of investing in Direct Property
Hear from Steve Bennett, Direct CEO at Charter Hall about the importance of commercial property in your investment portfolio.
Commercial property investment basics
On this page, we’ll cover the basics of commercial property investment, including advantages and risks, how to get started, and what potential returns to expect.
What is commercial property investment?
Direct funds or listed real estate investment trusts (REITs) often provide access to high quality commercial properties in diversified portfolios. You can invest as an individual, through a self-managed super fund (SMSF) or through other entities such as companies or trusts.
Common commercial property types include:
- Office: Office property can include anything from one or two-storey blocks to iconic CBD towers. Tenants may be private businesses or government agencies.
- Industrial: We use the term ‘industrial’ to cover warehouses, manufacturing plants and logistics facilities. Distribution centres have become popular with the rise of e-commerce websites creating greater demand for storage and freight.
- Retail: Retail property is some of the most recognisable commercial property. It includes bricks and mortar stores, shopping centres and retail centres like Bunnings.
- Social infrastructure: Much of our social infrastructure is privately owned and make for potential investment opportunities. Early learning centres and healthcare assets are two examples.
Important commercial property jargon
Before we proceed, these are some of the important commercial property terms will be helpful to understand when considering investing in commercial real estate.
- WALE (weighted average lease expiry): In a property with two or more tenants, WALE refers to the average lease expiry between them. A high WALE means tenants, on average, will remain in the building for some time, while a low WALE is of course the opposite. The ‘weight’ of a WALE calculation may be based on the amount of floor space a tenant occupies, or the income they are generating. So in a retail centre with one massive supermarket and 10 small stores, the supermarket’s lease will affect the WALE more than any individual shop as it is both larger and pays higher rent.
- Occupancy: Occupancy refers to whether the building has tenants, and how much of the building is occupied. It is measured as a percentage of occupied floor space to total space in the property. Commercial property performance is heavily reliant on high levels of occupancy.
- Capitalisation rate: The capitalisation rate, also known as cap rate, is a calculation comparing the income generated from a property with the value of the property.
- Tax deferred: If you see something as being ‘tax deferred’ or known as a ‘tax-deferred scenario/scheme’, this refers to the possibility of paying tax in a different year to the one in which income is distributed.
- Direct property fund: A direct property fund is a managed investment scheme where multiple investors’ money is pooled together to purchase property assets. Ownership is shared between investors based on their investment portion, but the actual investment is determined by the fund manager.
- Listed property fund: A listed property fund is a commercial property or portfolio of properties listed on the Australian share market (ASX). These are also known as Australian real estate investment trusts (A-REITs). Like direct funds, A-REIT investments are made by a fund manager with pooled-together finances from investors.
Investing in commercial property versus residential property
One of the most important things to know about investing in commercial or residential property is that, while there may be similarities between the two markets, they have different investor and occupier profiles. Below are some characteristics to be aware of.
Value
Residential property typically has a lower capital price compared to the other commercial real estate classes. A commercial office, industrial or retail asset typically requires significantly more capital to acquire and maintain. As such, direct investment in commercial property is undertaken by a fewer number of investors who have the required knowledge and financial capacity to purchase multi-million-dollar assets; and the operational capacity to undertake the day-to-day management.
Lease terms
The lease profiles between residential and commercial are markedly different. Commercial real estate leases are usually longer, typically ranging from three to 20 years. These commercial leases usually benefit from fixed annual or market related annual rental increases.
Tenants
Commercial property leases tend to be to quality tenants which generally have low risks of defaulting. These include tenants such as Commonwealth or State government agencies or well-regarded corporations. Good managers undertake comprehensive tenant analysis and target quality tenants through economic cycles.
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Advantages of commercial property investment
- Low volatility: Commercial property is considered a less volatile asset class than other investment options, such as equities. It can form a regular, long-term component of a well-balanced investment portfolio.
- Returns: As an investment based on long-term stability, commercial property can provide regular income over a period of years. Income is generally distributed to investors either monthly or quarterly. That said, performance varies between funds and past performance is not a reliable indication of future performance.
- Tax deferred income: Commercial property funds may offer a tax-deferred income component to investors. Tax deferred income means that some income may be taxed in a different year than the one in which income was distributed.
- Purchase decisions managed by experts: For the most part, managed funds and A-REITs benefit from property purchase decisions being made by experienced professionals. Fund managers and their transaction teams will typically have extensive networks within the market to source potential deals, and exhaustive processes to decide whether a property is right to purchase, develop or leave.
Risks of commercial property investment
As with all investments, an investment in commercial property carries a number of risks. Below are a few of the key risks that you should consider. However, the risks detailed below are not an exhaustive list and you should read the relevant fund Product Disclosure Statement in full before deciding whether to invest in any fund and if you are in any doubt, you should consider consulting your financial adviser, stockbroker or other professional advisers.
- Illiquid asset: Commercial property is considered illiquid and investors should consider investment timeframes of five years or more.
- Property fluctuations: Commercial properties are susceptible to fluctuations in value over time. Factors such as lease terms, cap rates or supply/demand may affect the ongoing value of a property asset.
- Legislative change: Changes in government legislation can have knock-on effects on the performance of some commercial properties. You can find out more about the features and risks of managed property funds in particular by reading the product disclosure statement of the relevant fund.
Getting started in commercial property investment
How do I invest in commercial property?
There are three typical ways individuals in Australia can invest in commercial property:
- Investing in a direct property fund: Here, individuals contact a fund manager such as Charter Hall about their funds open to investment, and choose one that is suitable.
- Investing in A-REITs: Here, individuals contact a stockbroker or online broking facility and identify listed commercial property trusts they wish to invest in. There are also managed funds that invest in A-REITs.
- Purchasing your own asset: Be it in your own name or through your SMSF, you can purchase commercial property in a similar way to residential property. You will put down a deposit on a commercial property loan and use that to purchase a piece of real estate. Then, you manage it yourself or use a specialist property manager.
What are some of the advantages of a managed fund?
- Simplicity: When investing through a direct Property fund, property management is undertaken by the manager. In this way, you get to own part of a property or portfolio of properties without the burden of purchasing decisions, finding tenants and organising maintenance.
- Accessibility: One big drawcard of direct Property funds is the market these investment options open up for investors. By pooling funds together from multiple parties, managed funds and trusts have vastly greater purchasing power and can offer investors access to institutional-grade properties otherwise inaccessible to them. The minimum deposit required to invest in a Charter Hall Direct Fund is $20,000 - far lower than the typical deposit needed for a commercial property venture.
- Diverse building portfolio: In the same way that a diversified investment portfolio spreads risk across asset classes, a diverse property portfolio spreads risks across multiple assets. Many fund managers, including Charter Hall, combine multiple assets into a single investment option. When investors purchase units in the fund, they are purchasing shares of sometimes hundreds of properties.
Interested in getting started? Understand how to invest with us
Commercial property investment via a direct property fund can offer regular income and the potential for capital growth. You can gain access to high-quality properties, and by doing your research into yields, occupancy and WALE, you should have a better idea of which properties will make for good investments.
If you’re interested in the benefits of a direct or listed property fund, talk to your financial adviser about Charter Hall or contact us directly.
Return on investment in commercial property
What is the expected return on a commercial property: If you know a thing or two about investing you'll understand that while commercial property can generate stable and long term returns, you will need to refer to the individual fund's product disclosure statement for further information.
There are some key things to understand when assessing performance though, including how performance is measured, how commercial property is valued and how we choose our investments.
How is performance measured?
You will see commercial property investment performance expressed in a few ways.
The performance of a building may be described by cap rate or rental yields. The cap rate is worked out by dividing net income (income such as rent minus costs) by the building’s market value. This percentage shows you the return based on the property value and outgoing costs.
You will also see mention of WALE and occupancy rates. These don’t tell you how much money to expect back based on your investment, but can tell you the risk of investing in a particular property. If occupancy rates are low, it means there aren’t many tenants - as we know, vacancies may take time to fill.
Low WALE suggests that tenants haven’t agreed to a long lease, or the lease for higher-weighted tenants will expire soon. This could lead to future occupancy issues.
How is commercial property valued?
Value in commercial property is driven by a number of factors including the size, location, and quality of the asset, as well as the number and type of tenants. These factors are assessed by both fund managers and independent valuation companies in an effort to determine the expected returns from a given property.
Valuation metrics include but are not limited to:
Occupancy: Occupancy and WALE are important figures in determining the risk and return of a commercial property. When these figures are higher, it can push up the value of a property.
Income: Similarly, the expected income of a commercial property can increase or decrease its value. While seemingly counter-intuitive, this may mean an older building has higher value than a modern building, if it is anticipated that it will earn more.
Standard of repair: The quality of the building does impact value to a degree. Buildings requiring extensive renovation, maintenance or repair may impact occupancy rates, and subsequently, anticipated returns.
Value of improvements: Fit outs and improvements can increase value, depending on the intended use of the property. For example, smart building control systems may make life easier for tenants or decrease the costs to manage the asset which could improve the building’s desirability.
Specialist property uses: Properties that have been designed to accommodate particular business types (i.e. luxury hotel accommodation) might have increased value when sold to those particular tenants.
Charter Hall’s capabilities
Charter Hall Group has been investing in and managing commercial properties for decades, holding a wide variety of high-quality property assets. That level of tenure cannot be attained without a significant degree of expertise, making us one of the country’s most trusted fully integrated property groups.
Our people are our difference. Charter Hall employs best-in-class property and investment professionals to ensure that we can find, acquire and manage commercial real estate assets all across Australia.
How do we find suitable properties?
We maintain extensive relationships with potential sellers and commercial agents to generate a flow of real estate investment opportunities, both on and off market. Additionally, we actively monitor the market for properties of interest that are publicly advertised. Once properly assessed, we acquire or develop the properties in question. This decision is based on the value of the property as well as its predicted performance.
Commercial property can offer regular income and the potential for capital growth.
You can gain access to high-quality properties by investing in a managed fund or A-REIT, and by doing your research into yields, occupancy and WALE, you should have a better idea of which properties will make for good investments.
If you’re interested in the benefits of a direct or listed property fund, talk to your financial adviser about Charter Hall.
With decades of experience and a history of success, we’ve become one of Australia’s leading property groups. To apply for a Charter Hall investment, download the product disclosure statement and discuss the investment with your adviser.
If at any point you have any questions, please don’t hesitate to contact our team.
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